Countries most vulnerable to climate change able to borrow less than 15% of money needed to adapt before hitting debt distress
Least developed countries and Small Island Developing States need grant-based budget support and ‘debt for climate and nature’ swaps.
Thirty of the world’s poorest countries, among the most vulnerable to a warming planet, are unable to borrow the money they need to adapt to climate change without getting into debt distress according to new analysis from IIED.
With the next round of global climate negotiations due to get under way next month in Egypt, finding the funds to pay for countries to adapt to climate change remains a key bottleneck. Not only have richer countries failed to fulfil their pledge made in Copenhagen 13 years ago, to provide US$100 billion in climate finance annually by 2020, the majority of the finance that has been made available has been as loans.
Over 70% of climate finance is still being provided as loans, often not even on concessional terms, adding to the growing debt crisis faced by many countries in the wake of COVID-19 and the Ukraine war.
The international community’s response to the growing debt crisis has been lacklustre with only Ukraine being offered grants at the recently concluded International Monetary Fund (IMF) and World Bank annual meetings. Grants should be at least 70% of climate finance for least developed countries (LDCs) and Small Island Developing States (SIDS) through debt swaps for climate and nature action, climate-related budget support and new reallocated Special Drawing Rights from the IMF for climate action.
The analysis presented in 'After the Paris Agreement, the debt deluge: how lending for climate drives debt distress' is based on the plans submitted to the UN by the LDCs and SIDS, known as Nationally Determined Contributions (NDCs). Every country is expected to submit an NDC, and update it periodically, laying out what steps it will take to cut its carbon emissions as well as measures needed to adapt to runaway climate change.
Current adaptation plans submitted by 30 countries – 21 of them LDCs, six of them SIDS and three which are included in both groups – report needs of an estimated $226 billion. The countries could fund less than 15% of that through sovereign debt before tipping into debt distress.
Countries’ adaptation costs are likely to be much more than this as climate impacts are compounded each year. NDCs by the remaining LDCs and SIDS do not include costings for adaptation, but these countries experience similar challenges.
Isatou F. Camara, principal development planner in The Gambian Ministry of Finance and Economic Affairs, said: “These calculations show the impossible situation of The Gambia and other vulnerable countries. There is a limit to the amount of debt we can take on and the grants provided fall far short of what is needed to address the higher sea levels, hotter temperatures and heavier rainfall to which we must adapt.”
Sejal Patel, an environmental economist at IIED, said: “Allowing low-income countries to swap debt or receive grant-based budget support in exchange for meeting key targets on climate and nature could simultaneously address both climate change and economic inequality which together threaten the lives of millions of the most vulnerable people.”
The LDCs and SIDS are facing a triple crisis of high debt levels, climate change and nature loss. Many are using up to 20% of their government spending to pay off loans.
Large-scale swaps or budget support move climate policies to the ministry of finance and the heart of economic decision-making away from loans which LDCs and SIDS cannot afford or environmental grants that are typically off budget with high transaction costs.
Notes to editors
IIED analysed the NDCs of 24 of the LDCs. They are: Angola, Eritrea, Somalia, Ethiopia, Madagascar, Haiti, Afghanistan, Mauritania, DRC, Uganda, Rwanda, Chad, Malawi, Senegal, Cambodia, Togo, Niger, Central African Republic, Guinea, Sudan, Gambia, Solomon Islands, Comoros and Liberia. The 9 SIDS analysed are: Haiti, Dominican Republic, Mauritius, Cabo Verde, Guyana, Belize, Comoros, Seychelles and Solomon Islands.
This analysis compares the costs of adaptation as presented in NDCs with the ‘borrowing space’ available to countries. The analysis defines the borrowing space as the difference between the sustainable debt to GDP threshold for the country and the debt to GDP ratio in 2020. The country specific sustainable debt to GDP thresholds are presented in the IMF-World Bank debt sustainability framework.